Some people equate life insurance with tragedy and death. In truth, life insurance is for the living. Without it, the sudden demise of a key breadwinner could leave a family stranded without the resources to maintain their lifestyle – or even retain their home.

Not so long ago, professionals recommended that families carry a life insurance policy with a death benefit of between five and seven times their annual household income. Today, however, in light of rising house prices in many parts of the country and spiraling college costs, most advisors now recommend eight to 10 times income.

Unfortunately, most American families are underinsured. According to statistics from industry research and consulting firm LIMRA International, the average American household carries just $126,000 in life insurance – approximately $300,000 less than they actually need – and only 61% of adult Americans have life insurance protection, a decline from 70% in 1984.1

A Cornerstone of Sound Financial Planning

Financial professionals generally consider life insurance to be a cornerstone of sound financial planning, for two key reasons. First, it can be a cost-effective way to provide for your loved ones after you are gone. And second, life insurance can be an important tool in the following ways:

1. Income replacement – For most people, their most valuable economic asset is their ability to earn a living. If you have dependents, then you need to consider what would happen to them if they could no longer rely on your income. A life insurance policy can also help supplement retirement income, which can be especially useful if the benefits of your surviving spouse or domestic partner will be reduced after your death.
2. Pay outstanding debts and long-term obligations – Without life insurance, your loved ones must shoulder burial costs, credit card debts, and medical expenses not covered by health insurance using out-of-pocket funds. The policy’s death benefit might also be used to pay off a mortgage, supplement retirement savings, or fund college tuition.
3. Estate planning – The proceeds of a life insurance policy can be earmarked to pay estate taxes so that your heirs will not have to liquidate other assets to do so.
4. Charitable contributions – If you have a favorite charity, you can designate some or all of the proceeds from your life insurance to go to this organization.

Determining How Much: A Four-Step Process

Determining how much life insurance coverage you need is a four-step process:

Step 1: Determine Your Family’s Short-Term Needs

Short-term needs are financial obligations and/or expenses arising within six months of death. Examples of short-term needs include expenses you pay now such as:

• Loan balances (automobile loans, etc)
• Outstanding credit balances (credit cards, revolving lines of credit, etc)
• Mortgages (first and second mortgage, home-equity loans, lines of credit)

Add to these current expenses any death-related expenses that must be paid in the short term:

• Funeral expenses
• Final medical costs
• Estate settlement costs and probate
• Estate taxes due
• Charitable bequests you would like to make upon your death

If you don’t already have one, your survivors should be left with a liquid emergency fund sufficient to get them through any unexpected financial needs. Most advisors recommend between three and six months’ worth of living expenses.

Step 2: Determine Long-Term Needs

In addition to covering your survivors’ short term needs, some level of monthly income will be needed to maintain their current standard of living and meet financial goals such as saving for retirement and funding college for children.

The value of these future obligations is discounted back to present value amounts to provide a dollar amount that, if invested, could provide an adequate income stream to fund all of your long-term goals.

Step 3: Calculate Your Total Available Resources

By this point, you should have a good idea of your family’s total cash needs in the event of your untimely death. With any luck, you have already begun to set money aside to cover some of these costs. Other resources that may be available to your family include pensions, annuities, funds from retirement accounts, employer-provided life insurance, and Social Security.

The Social Security program offers benefits to survivors under age 17, and those whose spouses were receiving retirement income from Social Security can also count on survivorship benefits.

The total value of these future resources is discounted back to present value amounts. This gives us a single dollar amount that we can use to offset your total needs.

Step 4: Provide Funds To Cover A Shortfall

In most cases, comparing total needs to total resources will result in a shortfall. That’s where life insurance comes in. Without it, your survivors will be left with the choice of either finding or creating additional resources (such as having the surviving spouse return to work) or experience a decline in the quality of their lifestyle.

Life insurance is uniquely suited for covering such a shortfall. It is a means of sharing the financial risk of premature death with many, many others who have similar concerns.

You pay a relatively small premium to an insurance company in exchange for their promise to pay your beneficiaries a specified death benefit in the event of your death. You may find it ironic that a financial need arising from death can be alleviated by a financial resource that is created after death. That’s why life insurance, although something no one hopes to ever need, is indeed for the living. It’s also a vital issue we can help you investigate in greater detail to ensure your family’s financial future will be protected.

1. “Life Insurance Awareness Month,” LIMRA International, August 2004

(Updated May 10, 2011)

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

Unless you live in a cave, you know that healthcare costs have accelerated in recent years. According to a recent study, more than 15% of the United States’ total gross domestic product (GDP) was spent on health care, and by 2014, this figure is expected to represent nearly one in every five dollars we spend!

What’s more, a growing number of Americans – more than 40 million, by latest count – don’t have any health insurance coverage at all.2 Without health insurance, a single illness can cause serious, and often irreversible, financial hardship.

Insurance of any kind is intended to transfer financial risk to an insurance company in exchange for a reasonable insurance premium. Where most insurance coverages pay once a loss has occurred, health insurance has the added benefit of paying to keep your loss from getting worse. Health insurance is probably your most important coverage since it can be the difference between life and death. Fortunately, most employers offer some form of health insurance. Often you will have to select from several different alternative plans with differing coverages and premiums.

Health Insurance Categories

There are two broad categories of health insurance coverage. One is fee-for-service and the other is managed health care, which is further divided into health maintenance organizations (HMOs), preferred provider organizations (PPOs), and point-of-service (POS) plans.

Fee-For-Service – A primary difference between fee-for-service and managed health plans in the amount of control you enjoy in choosing doctors and hospitals. Fee-for-service plans give you the greatest amount of choice, allowing you to select doctors and hospitals based on your needs and preferences. This greater amount of choice comes at a cost, however, as fee-for-service plans are usually more expensive than managed care plans.

Under a fee-for-service plan, your doctor will submit a bill to your insurance provider, or, if he or she does not have a relationship with your provider, you may have to pay the bill directly and get reimbursed by your provider. Under this plan, you can generally see any doctor you wish. You will most likely be responsible for a percentage of every expense, typically 20% but sometimes higher or lower.

Fee-for-service plans also have an annual deductible; these generally start at $100 for individuals and $500 for families. Typically, the higher the deductible, the lower your premiums. You’ll have to meet the deductible amount before receiving any reimbursement,

If your doctor charges more than is “reasonable” as defined by your policy, you will have to pay the difference. You can appeal this if you feel the doctor is charging the same as the other doctors around your area.

Fee-for-service plans usually limit how much you will have to pay before the plan reimburses you at 100%. Some plans also have a lifetime limit on benefits, usually at least $1,000,000. This seems very high but it is not uncommon with serious accidents or illnesses that this number is met.

Managed Care

There are three major types of managed care health plans — HMOs, PPOs, and POSs – which generally charge a co-payment of $10 or $20 a visit. One limitation of an HMO is that you must use the doctor and hospitals that participate in the plan. The premiums are generally lower than fee-for-service plans.

With a managed care plan, you will have to select a primary care physician (PCP) who will be responsible for coordinating your care. You will need to be approved by the PCP to seek care by a specialist. You must also get authorization for any hospitalization you may require. As you can see, the lower premiums associated with managed care are the result of allowing the managed care provider to make many of your health care decisions for you.

PPOs and POSs differ from HMOs in that you can choose between the organization’s network of providers but can see physicians outside the network if you desire.

Other Considerations

If you choose not to utilize the coverage offered at work, or if no coverage is available through your employer, you could get your own personal policy or go through a group. Group policies have lower premiums. Also, some group policies do not ask questions about your health. Nevertheless, some policies will not cover pre-existing conditions for up to 12 months. You will want to understand all the pre-existing limitations that your coverage includes. If you have had health coverage for at least two years and change employment, you won’t be affected by the exclusion.

If you are terminated from or leave a job in which health insurance was provided for you, the government has established guidelines for maintaining your old coverage at your own expense until you can find new coverage. Created by the Consolidated Omnibus Budget Reconciliation Act, this so-called COBRA program gives workers and their families who lose their health benefits the right to choose to continue health benefits provided by their group health plan for limited periods of time under certain circumstances such as voluntary or involuntary job loss, reduction in the hours worked, transition between jobs, death, divorce, and other life events.

Decoding MSAs and HSAs

For small businesses and the self-employed, a Medical Savings Account, or MSA, is a tax-exempt account established for the purpose of paying medical expenses in conjunction with a high-deductible health plan. Like an IRA, an MSA is established for the benefit of the individual, and is “portable.” Thus, if the individual is an employee who later changes employers or leaves the work force, the MSA does not stay behind with the former employer, but remains with the individual.

Introduced in 2004, Health Savings Accounts, or HSAs, are similar to MSAs. However, MSA eligibility is restricted to employees of small businesses and self-employed individuals, while HSAs are open to everyone with a high-deductible health insurance plan. The interest and investment earnings generated by the account are also not taxable while in the HSA. Amounts distributed are not taxable as long as they are used to pay for qualified medical expenses. Amounts distributed that are not used to pay for qualified medical expenses will be taxable, plus an additional 10% penalty is applied to prevent the use of the HSA for nonmedical purposes.

Given the bills you could face for an unanticipated illness or injury, health insurance is probably the most important coverage you can have. Although you might be in fine health now and think you’ll never need it, don’t bet your life on it – or your financial future.

1. “Health Tracking,” Office of the Actuary, Centers for Medicare and Medicaid Services, February 23, 2005
2. National Coalition on Health Care, based in 2003 statistics

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

Your home is likely the largest investment you will ever make, and the things you keep inside it – wedding photos, collectibles, silver and china, jewelry, antique furniture – are probably your most prized possessions. That’s why it’s crucial to carry enough insurance to safeguard your home and everything in it.

You should have insurance on the land, the physical structure of the house, and also its contents against theft, fire, windstorm, or some other disaster. It’s also wise to be insured for personal liability. This would cover an accident that might occur to someone who is visiting or working in your home.

Homeowners Insurance – What’s Included

A standard policy provides limited protection against, for example, fire and theft. Broader coverage gives you insurance for additional losses except those specifically excluded from the policy. You can also get special insurance with separate premiums for items such as jewelry, artwork, and collectibles.

What’s NOT Covered

No basic policy covers losses resulting from war, riots, police actions, nuclear explosion, or “acts of God.” You can sometimes get an endorsement to your policy to cover circumstances that are normally excluded, such as floods and earthquakes, but it will likely be expensive. If you’re in an area prone to such events, however, it could prove well worth the cost.

Other Considerations

Consider liability coverage, which protects you if you are sued for causing property damage or injuring someone. As for deductibles, amounts vary. Your insurance costs less if you take a larger deductible, but, of course, you will have to pay the amount of any loss up to the deductible.

How Much Insurance Should You Buy?

You should insure your house for at least 80% of its replacement value. However, most financial planners recommend that you insure your house for its full replacement value, and perhaps the replacement value of the contents of your home. Carefully read the terms of the policy so there will be no surprises in the event of a loss. Some policyholders believe their homeowners insurance will pay to completely rebuild their house, only to discover caps that limit the insurance company’s liability and force them to spend thousands out of pocket.

One word of caution . . . when buying a home, if your down payment is less than 20% of the purchase price, you will probably be required to purchase mortgage insurance. Do not pay it as part of your mortgage; instead, pay it separately and cease paying it when your equity reaches 20% of the home’s value. Mortgage insurance is designed to benefit the mortgage lender, not the homeowner.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

If you put a downpayment of less than 20% when you bought your home, chances are good that you had to purchase private mortgage insurance, or PMI, in order to qualify for your loan. A mortgage insurance policy protects the bank in the event they are forced to repossess your house and sell it at a loss. As with most other types of insurance, you pay a monthly premium on top of your monthly mortgage payment for this policy. A mortgage insurance policy provides the means for purchasing a house you may otherwise be unable to afford, due to a limited down payment.

The good news is, PMI makes it possible for a homebuyer to obtain a mortgage with a down payment as low as 5% and for low-to-moderate income homebuyers as low as 3%. PMI may be also required when buying a second home or refinancing an existing mortgage with cash out. Mortgage insurance protects the mortgage lender against financial loss if a borrower defaults.

Low-down-payment mortgages are becoming more popular. Mortgage insurance allows borrowers to purchase a more expensive home than they might otherwise be able to afford. With lower downpayment, you might retain more funds for home furnishings or remodeling, buying a car, or other investments.

The mortgage insurance premium is based on loan to value ratio, type of loan, and amount of coverage required by the lender. The good faith estimate of closing costs provides the estimated premium and monthly cost for the PMI coverage.

It may be possible to cancel PMI at some point, such as when your loan balance is reduced to a certain amount – below 75% to 80% of the property value. The law in certain states requires that mortgage insurance be cancelled under some circumstances. But because of the wide variation in lender, investor and state requirements, it is necessary to find out the specific requirements for cancellation before you commit to paying for mortgage insurance.

Federal legislation enacted in 1999 made it a little bit easier to rid yourself of your monthly mortgage insurance premium. It requires lenders to automatically eliminate your mortgage insurance once you own 22% of your personal residence. Unfortunately the 22% equity is based on the value of your loan compared to the home’s original purchase price so the lender does not take into account the appreciation of your home – just the gradual paydown of your mortgage. However, some lenders will consider your home’s appreciation in deciding whether or not PMI is still required, so it doesn’t hurt to ask.

Mortgage insurance should not be confused with mortgage life insurance, which is designed to pay off a mortgage in the event of the borrower’s death.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.